Lowe's 2005 Annual Report Download - page 42

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฀ L O W E ’ S ฀ ฀2 0 0 5 ฀ ฀A N N U A L ฀ ฀R E P O RT
Note฀11฀ LEASES
The฀Company฀leases฀store฀facilities฀and฀land฀for฀certain฀store฀facilities฀under฀
agreements฀with฀original฀terms฀generally฀of฀20฀years.฀For฀lease฀agreements฀
that฀provide฀for฀escalating฀rent฀payments฀or฀free-rent฀occupancy฀periods,฀
the฀Company฀recognizes฀rent฀expense฀on฀a฀straight-line฀basis฀over฀the฀non-
cancelable฀lease฀term฀and฀any฀option฀renewal฀period฀where฀failure฀to฀exercise฀
such฀option฀would฀result฀in฀an฀economic฀penalty฀in฀such฀amount฀that฀renewal฀
appears,฀at฀the฀inception฀of฀the฀lease,฀to฀be฀reasonably฀assured.฀The฀lease฀
term฀commences฀on฀the฀date฀when฀all฀conditions฀precedent฀to฀the฀Company’s฀
obligation฀to฀pay฀rent฀are฀satisfied.฀The฀leases฀generally฀contain฀provisions฀for฀
four฀to฀six฀renewal฀options฀of฀five฀years฀each.
฀ Some฀agreements฀also฀provide฀for฀contingent฀rentals฀based฀on฀sales฀
performance฀in฀excess฀of฀specified฀minimums.฀In฀2005,฀2004฀and฀2003,฀
contingent฀rentals฀were฀insignificant.
฀ Certain฀equipment฀is฀also฀leased฀by฀the฀Company฀under฀agreements฀
ranging฀from฀two฀to฀five฀years.฀These฀agreements฀typically฀contain฀renewal฀
options฀providing฀for฀a฀renegotiation฀of฀the฀lease,฀at฀the฀Company’s฀option,฀
based฀on฀the฀fair฀market฀value฀at฀that฀time.
฀ The฀future฀minimum฀rental฀payments฀required฀under฀capital฀and฀operat-
ing฀leases฀having฀initial฀or฀remaining฀non-cancelable฀lease฀terms฀in฀excess฀of฀
one฀year฀are฀summarized฀as฀follows:
฀
Operating฀Leases฀ Capital฀Leases
(In฀millions)฀ ฀ Real฀ ฀ Real฀
Fiscal฀Year฀ ฀ Estate฀ Equipment฀ Estate฀ Equipment฀ Total
2006฀฀ ฀ ฀ $ ฀ ฀฀ 278฀ $ ฀ 1฀ $฀ 58฀ $ ฀ 1฀ $ ฀ ฀฀ 338
2007฀฀ ฀ ฀ 280฀ 1฀ 59฀ –฀ 340
2008฀฀ ฀ ฀ 279฀ 1฀ 59฀ –฀ 339
2009฀฀ ฀ ฀ 278฀ –฀ 58฀ –฀ 336
2010฀฀ ฀ ฀ 278฀ –฀ 58฀ –฀ 336
Later฀years฀฀ 3,522฀ –฀ 335฀ –฀ 3,857
Total฀minimum฀฀
฀ Lease฀payments฀ $฀4,915฀ $฀3฀ $฀627฀ $฀1฀ $฀5,546
Total฀minimum฀capital฀lease฀payments฀ ฀ $฀628
Less฀amount฀฀
฀ representing฀interest฀ ฀ ฀ 228
Present฀value฀of฀minimum฀lease฀payments฀ ฀ 400
Less฀current฀maturities฀ ฀ ฀ 25
Present฀value฀of฀minimum฀lease฀payments,฀฀
฀ less฀current฀maturities฀ ฀ ฀ $฀375
฀ Rental฀expenses฀under฀operating฀leases฀for฀real฀estate฀and฀equipment฀
were฀$328฀million,฀$271฀million฀and฀$238฀million฀in฀2005,฀2004฀and฀
2003,฀respectively.
Note฀12฀ EMPLOYEE฀RETIREMENT฀PLANS
The฀Company฀maintains฀a฀defined฀contribution฀retirement฀plan฀for฀its฀employees฀
(the฀401(k)฀Plan).฀Employees฀are฀eligible฀to฀participate฀in฀the฀401(k)฀Plan฀after฀
completing฀90฀days฀of฀continuous฀service.฀Participants฀are฀allowed฀to฀choose฀
from฀a฀group฀of฀mutual฀funds฀in฀order฀to฀designate฀how฀both฀employer฀and฀
employee฀contributions฀are฀to฀be฀invested.฀The฀Company’s฀common฀stock฀is฀
also฀one฀of฀the฀investment฀options฀for฀contributions฀to฀the฀401(k)฀Plan.฀Company฀
shares฀held฀on฀the฀participants’฀behalf฀by฀the฀401(k)฀Plan฀are฀voted฀by฀the฀
participants.฀The฀Company฀makes฀contributions฀to฀the฀401(k)฀Plan฀each฀pay-
roll฀period฀based฀upon฀a฀matching฀formula฀applied฀to฀employee฀contributions.฀
In฀addition,฀the฀Company฀offers฀a฀performance฀match฀to฀eligible฀401(k)฀Plan฀
participants฀based฀on฀growth฀of฀Company฀earnings฀before฀taxes฀for฀the฀fiscal฀
year.฀401(k)฀Plan฀participants฀must฀have฀three฀or฀more฀years฀of฀employment฀
service฀and฀be฀actively฀employed฀on฀the฀last฀day฀of฀the฀fiscal฀year฀to฀be฀eligible฀
for฀the฀performance฀match.฀The฀performance฀match฀is฀funded฀in฀participant฀
accounts฀in฀April฀of฀the฀following฀year.฀The฀Company’s฀contributions฀to฀the฀401(k)฀
Plan฀vest฀immediately฀in฀the฀participant฀accounts.฀Once฀participants฀reach฀age฀
591/2,฀they฀may฀elect฀to฀withdraw฀their฀entire฀401(k)฀Plan฀balance.฀This฀is฀a฀
one-time,฀in-service฀distribution฀option.฀Participants฀may฀also฀withdraw฀contri-
butions฀and฀rollover฀contributions฀while฀still฀actively฀employed฀for฀reasons฀of฀
hardship.฀In฀addition,฀participants฀with฀20฀or฀more฀years฀of฀service,฀who฀have฀
an฀Employee฀Stock฀Ownership฀Plan฀carryforward฀account฀balance฀within฀the฀
401(k)฀Plan,฀can฀elect฀to฀receive฀a฀one-time,฀in-service฀distribution฀of฀50%฀of฀
this฀account฀balance.
฀ The฀Company฀maintains฀a฀Benefit฀Restoration฀Plan฀(BRP)฀to฀provide฀
benefits฀in฀addition฀to฀those฀provided฀under฀the฀401(k)฀Plan฀to฀401(k)฀Plan฀
participants฀whose฀benefits฀are฀restricted฀as฀a฀result฀of฀certain฀provisions฀of฀
the฀Internal฀Revenue฀Code฀of฀1986.
฀ The฀Company฀also฀maintains฀a฀non-qualified฀deferred฀compensation฀
program฀called฀the฀Lowe’s฀Cash฀Deferral฀Plan.฀This฀plan฀is฀designed฀to฀permit฀
highly฀compensated฀employees฀to฀defer฀receipt฀of฀portions฀of฀their฀compen-
sation,฀thereby฀delaying฀taxation฀on฀the฀deferral฀amount฀and฀on฀subsequent฀
earnings฀until฀the฀balance฀is฀distributed.฀This฀plan฀does฀not฀provide฀for฀
employer฀contributions.
฀ The฀Company฀recognized฀expense฀associated฀with฀contributions฀to฀
employee฀retirement฀plans฀of฀$136฀million,฀$68฀million฀and฀$83฀million฀in฀
2005,฀2004฀and฀2003,฀respectively.
Note฀13฀ INCOME฀TAXES
The฀following฀is฀a฀reconciliation฀of฀the฀effective฀tax฀rate฀to฀the฀federal฀statutory฀
tax฀rate฀for฀continuing฀operations:
฀ ฀ ฀ ฀ ฀ ฀ 2005฀ 2004฀ 2003
Statutory฀federal฀income฀tax฀rate฀ ฀ 35.0%฀ 35.0%฀ 35.0%
State฀income฀taxes,฀฀
฀ net฀of฀federal฀tax฀benefit฀ ฀ 3.6฀ 3.5฀ 3.1
Stock-based฀compensation฀expense฀฀ 0.1฀ 0.2฀ 0.2
Other,฀net฀ ฀ ฀ (0.2)฀ (0.2)฀ (0.4)
Effective฀tax฀rate฀ ฀ 38.5%฀ 38.5%฀ 37.9%
฀ Components฀of฀Income฀Tax฀฀
฀ Provision฀for฀Continuing฀Operations
(In฀millions)฀ ฀ ฀ 2005฀ 2004฀ 2003
Current
฀ Federal฀ ฀ ฀ $฀1,514฀ $฀1,077฀ $฀฀ ฀834
฀ State฀฀ ฀ ฀ 254฀ 174฀ 124
Total฀current฀ ฀ 1,768฀ 1,251฀ 958
Deferred
฀ Federal฀ ฀ ฀ (28)฀ 86฀ 143
฀ State฀฀ ฀ ฀ (5)฀ 23฀ 14
Total฀deferred฀ ฀ (33)฀ 109฀ 157
Total฀income฀tax฀provision฀ ฀ $ ฀ 1,735฀ $ ฀ 1,360฀ $ ฀ 1,115